Big Changes In China Challenge French Retail Giant Carrefour

(nicolas-auvinet) -

The world's second largest retailer, Carrefour, insists it is not pulling out of the massive Chinese market. Still, a closer look at the French company's struggles offers a window into how quickly things can change when doing big busines

BEIJING – “Big” is the operative word for both French-owned retail giant Carrefour, and the People’s Republic of China. So when rumors began circulating last month that Carrefour was planning to pull out of China and hand over its operations to the local China Resources Group conglomerate, it made some big waves.

Carrefour immediately denied the rumors, and the public relations spokesman of Carrefour China told the Economic Observer that the company will maintain its rhythm of opening 20 to 25 new branches per year.

Yet behind the rumor lies the truth that Carrefour China has seen much better days. Since July 2010, it has shut down six of its stores. One source close to Carrefour pointed out that the retailer has been suffering from severe staff turnover and increasing pressure on its cost control.

The shining image of this retail giant’s entry to China is in the process of being tarnished. Over the past two years, the foreign-financed RT-Mart, as well as Vanguard and Dashang Group, have all overtaken Carrefour in growth in the retailing business.

In recent years, Carrefour has lost all the privileges that it enjoyed as a foreign enterprise when it first entered China, both in terms of obtaining land and opening stores. The cost of stores and logistics have greatly increased. “It’s very difficult to follow the previous mode of operation for achieving the desired targets,” a source close to Carrefour said.

Carrefour is now adjusting its strategy, choosing to open new stores in second and third-tier cities, and the suburbs and surrounding satellites towns of first tier cities.

Carrefour closed four stores last year. It is said their closure was all due to bad location choice and poor management. The Carrefour China press office says that Carrefour currently has 180 stores, therefore the closing down of unprofitable ones is normal and in accordance with its strategic adjustment.

But a well-placed Carrefour source said that because of China’s change in policy to favor domestic enterprises, it is now impossible for Carrefour to obtain locations in core business districts, particularly in places like Shanghai and Beijing.

In addition, virtually all of the 180 Carrefour stores are rented, whereas Walmart and Tesco and other foreign companies have all invested in real estate in China.

Trying to keep up with China's boom

Carrefour’s first stores in the country signed their 20-year lease contracts in 1995. This means that it will face a huge cost rise in 2015. And the fact that local governments no longer offer preferential policies for foreigner investors makes all the difference.

Lars Olofsson, the chairman and CEO of Carrefour, announced the company’s semi-annual report in August. As the world’s second biggest retailer, it had a net loss of 249 million euros in the first quarter of 2011. The French media quickly predicted that restructuring will be unavoidable for Carrefour China.

Over the past year, Walmart has being expanding its investment in China, while RT-Mart’s market share continues to rise. Carrefour’s ranking of its sales in hyper-markets has been seriously affected. In 2009, out of China’s top 100 chain stores, the Brilliance Group, Dashang Group and Vanguard all exceeded Carrefour.

Over the past two years, Carrefour China’s staff turnover has been very high. In June last year, numerous manager-level employees of its East China stores resigned en masse. It’s said the pressure on employees came directly from Eric Legros, the current president of Carrefour China. Legros has focused much of his attention on the connections between the farm and the supermarkets, as well as food security. He is determined to reform Carrefour China.

In an earlier interview, Mr. Legros confirmed that his reforms did encounter quite a bit of controversy and questioning, but he is seeking the balance point between the centralization and decentralization. All he needs, he says, is time.

But the anonymous company source says that Mr. Legros has had difficulty understanding Chinese customs. He thinks in a French way and does not take into account “Chinese characteristics.” For instance, when a Chinese development manager hands in an evaluation report about a new site, very often the manager’s viewpoint would be at odds with his.

“He rarely listens to anyone. And so the next time, the manager will not bother to give his opinion, but just listen to him and execute whatever he wants,” the source said.

When foreign retailers first came to China, their decisions about where to open stores were very different compared to what was done back at home. At that time, Chinese customers rarely owned a car, so the stores were not usually opened on the outskirts of a city, but rather in residential areas and often crowded locations.

But these days, such locations cost too much and are difficult to obtain. So the speed of opening new stores has been slowing down. A store in Beijing which has a turnover of around 200 million RMB, of which between 5-10% goes to rent before even counting the other costs in water and electricity etc., won’t be able to make any profit, says one Chinese retailing expert

In this respect, Carrefour’s strategy of going into suburbs and mid-sized cities is on target. Even Chinese companies are following this trend. But compared to the increasing technological investment that Walmart put into its logistics system and satellite information centers, Carrefour lags behind, spending more resources on marketing, says the source. “If Carrefour still counts on its human resources only, it won’t even be able to compete with the local retailers.”